Directors’ wrongful trading clearly defined
Case briefing: Grant and Tickell as joint liquidators v Ralls and Hailstones
The liquidators of a failed building company alleged wrongful trading against the directors because they had kept going too long, namely between the end of July 2010, or perhaps the end of August 2010, until late September 2010 when they put the company into administration. They replied that trading during the summer was invariably profitable so would not prejudice creditors, they were then seeking an investment from a potential buyer (Mr J) and they had taken advice in August about whether they were trading wrongfully.
The directors needed to show, and in this case could, that continued trading was intended to reduce the net deficit and was conducted so as to minimise the risk of loss to individual creditors. The real issue was when a reasonably diligent person with the same skill and experience as the directors ought to have concluded there was no reasonable prospect of doing a deal with Mr J.
The liquidators did not get their costs. Directors may continue to draw genuine non-excessive salaries during the period before an insolvency without losing their defence to wrongful trading.
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